New Jersey governor Chris Christie gave his state of the state address today in which he tried to scare his listeners about the severely underfunded public pension plan that New Jersey maintains (and I use that word loosely). He scared me. Not so much with his numbers but with his obvious incomprehension of what he was spouting.
Here is the video excerpt with my comments underneath:
The pension reforms proposed, as I pointed out at the time, are generally otiose. Only the elimination of cost-of-living-adjustments will have any impact (and that over a time that the plan does not have) while having public employees pay more for their pensions and health care will spur more to retire and cash in on this ponzi scheme while they can.
Nobody in that room had either the inclination, imagination, or intelligence to grasp that simple concept. I was convinced of that fact when they panned the audience and not one person seemed a bit conflicted when hearing that the fund would have a deficit of $183 billion ‘within 30 years’ and that independent experts have said the fund will run out of money in 9 years. Or that the contribution in that 30th year could be $13 billion when annual payouts to retirees are $8 billion NOW! Or that the $13 billion (payable 30 years from now remember) is more than what the state spends on its “entire system of public education” as if nobody out there ever heard of the concept of the time value of money.
Review that video now and tell me, with this innumerate leadership in place, that the New Jersey pension system will outlast Illinois’……or Philadelphia’s……or even this administration.
Posted by NFS on January 12, 2011 at 9:12 am
John,
What would your solution be? I don’t think the taxpayers can absorb any more tax increases. Should the State look to convert what’s left and allocate that to individual 401k’s? Legally, I imagine that would be impossible? Let it go broke and wait for Greece-like riots?
Perhaps the State and the Unions should jointly select an actuarial group to come up with a viable plan because I agree that politicians need to step aside.
I imagine Sweeney sits in on meetings with the Ironworker Pension Plan actuaries. He must know the current proposed reforms won’t scratch the surface on a most dire situation.
Posted by burypensions on January 12, 2011 at 1:04 pm
I had a solution years ago:
http://blog.nj.com/njv_johnbury/2008/11/rip_new_jersey_state_pension_p_2.html
It still holds.
Posted by muni-man on January 12, 2011 at 12:31 pm
At some point, I believe the Fed will get involved. If they pass PEPTA (Public Employee Pension Transparency Act) that might be a catalyst that forces the states to quit the smoke-and-mirrors stuff covering up their real pension liabilities. But right now you’ve got all these states/cities continuing the game-playing. I think a few things can be fairly safely assumed:
(1) the Fed won’t come riding to the rescue now that the GOP has the House, (2) there is absolutely no way taxpayers are gonna tolerate being stuck with the bill for these pensions that were garnered by the self-dealing of the unions & pols over many years, and (3) absent
massive givebacks by the unions (not likely), there will be wholesale pension failures nationally.
I think the Fed should pass PEPTA, force honest reporting, determine which entities can/can’t
crawl out of their pension holes w/o added taxpayer funding, and then set strict guidelines and timeframes for either folding their plans and returning whatever remaining assets there are in them to plan members, or allow them to continue under much stricter financial reporting standards with realistic funding and benefit levels. If Taxpayer:Employee funding was on a ratio of 1:1 all along, then benefits would have been constrained from going thru the roof like they have. The unions hung themselves and I have no sympathy for any of them – not when many plans require funding ratios of 6:1 or more. That’s pure taxpayer gouging.
I’ll continue to email CC and advise him not to contribute another dime to these white elephants. It’s gonna be an interesting year seeing what develops since the Dems are clearly fearful of losing the statehouse this Nov., and I believe they will.
Posted by burypensions on January 12, 2011 at 1:03 pm
PEPTA (http://nunes.house.gov/_files/BILLS111hr6484ih.pdf) specifies:
“LIMITATIONS ON FEDERAL RESPONSIBILITIES RELATING TO PLAN OBLIGATIONS AND LIABILITIES.—
The United States shall not be liable for any obligation related to any current or future shortfall in any State or
local government employee pension plan. Nothing in this Act (or any amendment made by this Act) or any other
provision of law shall be construed to provide Federal Government funds to diminish or meet any current or future
shortfall in, or obligation of, any State or local government employee pension plan. The preceding sentence shall also
apply to the Federal Reserve.”
Translation: No bailouts, no way.
Posted by muni-man on January 12, 2011 at 1:33 pm
JB, your solution makes perfect sense. Ultimately something like that is gonna occur. Passing PEPTA would just force the issue even more and put MAJOR pressure on
Ca., Il., N.Y. and N.J., as well as a host of major cities and
some other states. They’ll be trapped then with absolutely no where to turn, and then the plans will be liquidated.
Posted by buddyroo30 on January 12, 2011 at 2:43 pm
You said in a reply to one of my previous comments (on another post) that you thought they would enact a higher gas tax to try to fix the pensions. Can you talk more about that? How much would this gas tax have to be in order to effectively deal with the pension problem? Are we talking about $4 a gallon, $5, $6, even higher?
Also, regarding your proposed solution of a couple years ago, how much longer until we won’t even be able to give back the workers’ own contributions with 2% interest?
Posted by burypensions on January 12, 2011 at 3:00 pm
The gas tax would solve the problem and it would be whatever it takes to pay out pensioners since the system would be pay-go then. Of course, there is no rationale for using a gas tax since current consumers would be subsidizing prior property-tax-payers. Once in place it would be adjusted as needed.
Assuming current employees are putting in about $2 billion a year now then $30 billion is a good estimate of the value of employee contributions of the $71 billion in there as of 10/31/10:
http://www.state.nj.us/treasury/doinvest/
(BTW, when Bill Clark was running DOI they never were this late in updating).
Future payouts will range from $8 billion to $12 billion over 5 years and with more deferrals and higher employee contributions, my guess is 2014 or 2015 when it’s only employee contributions.
That’s also a point Christie missed. He had 9 years when assets dropped to $0 but seemed blind to the fact that a good chunk of the money that would disappear would be the employees’ own contributions – both for those working and retirees who hadn’t gotten their contributions back.
Posted by muni-man on January 12, 2011 at 4:13 pm
A gas tax would be an absolute windfall for stations in NY, PA and DE. If this is the logic they’re using to try and square the pension circle, it ain’t gonna work. They should follow your advice in post #2 above before its’ too late – but they won’t.
Posted by burypensions on January 12, 2011 at 4:19 pm
A gas tax was something I just through out there because they could sell it on environmental grounds as good for you. Any general tax would do but they already increased the sales tax and tried with tolls.
I can’t think of any others except for a pet tax I’ve been kicking around. How about a tax on campaign contributions? If a connected law firm wants to give $1,000 to their favorite politician why not have them kick in a percentage (even multiples) of that to general revenue (or pension funding) to offset the spoils those politicians will be steering their way?
Posted by Joe Habanni, NYC, NY on January 12, 2011 at 3:48 pm
John, I noticed in Gov. Christie’s speech that he again called for (a) increasing retirement ages, (b) eliminating the CPI increases, and (c) raising employee contributions.
The CPI (if never reinstated) is a biggie as this alone will reduce overall costs 25-30%. Also helpful are increased contributions, but both are too little to late. Increasing the retirement age ….. IF that really means increasing the minimum age for payout of unreduced benefits …. is also a big cost-saver, but again, not much in the near term.
Noticeably absent this time was the call to rollback the 9% increase in 2001. That’s not a good sign, considering that they really need a a 50% decrease, or better yet, a “hard freeze” to end ALL future growth in pensions for current employees.
Unfortunately the Democratic legislature won’t play ball … at least not until everything goes belly-up as you have demonstrated.
Posted by NFS on January 12, 2011 at 3:53 pm
Thanks for the link. Your work is appreciated.
Speaking to your response about subsidizing prior property taxpayers’ obligations, isn’t that exactly what is going on now when deferrals happen? My neighbor, a teacher, left the State promptly upon retirement. Those deferrals are now on the shoulders of the new property owner.
There is no way the State could embark on a gas surcharge to fund the pension plans and when I read about one of the Trenton masterminds proposing it, I cringed.. With energy prices skyrocketing, It would be a catastrophe on the State economy, wouldn’t it? On the other hand, it could be just what the doctor ordered.
Posted by muni-man on January 12, 2011 at 5:01 pm
JB, maybe they could put an extra line on NJ1040 “Would you like to contribute $27,625.00
to help fund the NJ State Pension Plans? YES NO
Seriously, I think NJ and the other ‘Big Three’ have totally boxed themselves in. Was reading that Moonbeam might propose a 10% pay cut in Ca. The only way to even stave off the inevitable for awhile is to whack the hell out of state/town headcounts, school budgets, dramatically increase employee pension & healthcare contributions and the like, and then even that isn’t going to carry the day ultimately as you’ve pointed out many times. Somehow, I get the feeling CC really knows that trying to save these plans is futile and he might be laying down alternate plans, contrary to his public utterances.
Posted by SkippingDog on January 13, 2011 at 1:52 am
It’s going to be particularly hard to bail out a pension system that the Governor continues to intentionally underfund by withholding the state’s required payments.
That’s like not paying your power bill and then wondering why the lights won’t go on when you flip the switch.
Posted by Tough Love on January 13, 2011 at 4:23 pm
Hi SkippingDog …welcome to NJ’s headache.
But unlike your home state of California and CA’s Gov. Brown, who still thinks raising taxes is a big part of the solution, Gov. Christie recognizes that NJ’s taxpayers have been played for the fool long enough.
He’s carrying a big “stick”, and he’s willing to use it … meaning that if real reform: reductions in benefits, higher retirement ages, LOLA elimination, and larger contributions …ALL for CURRENT employees aren’t approved, he simply won’t fund the Plan.
Between you and I, he can’t save it anyway (and I think he knows it) because (a) it’s currently in the hole $50-$150 Billion, depending on the assumptions used, (b) the negotiated taxpayer-funding grade-in of 1/7, 2/7, 3/7, etc. of each year’s normal full-required contribution will only INCREASE the underfunding by $20-$30 Billion over this period, and (c) within 2-3 years, remaining Plan assets will be less than the out-of-pocket contributions of current workers, and it hard to see how these funds could be pay out to retirees (instead of being returned to those contributing them).
Greed has a price …… both in NJ and in CA.
Posted by muni-man on January 14, 2011 at 8:37 pm
I take comfort in the fact that even if PEPTA doesn’t go anywhere in Congress, all new spending bills MUST originate in the House which now, thankfully, is firmly under GOP control. Guys like Issa, Ryan, Nunes, etc. aren’t gonna bail out CA, NY, IL or NJ. Christie knows this. He’s holding trump and unless/until the unions cave in to his demands I strongly doubt he’s gonna authorize any more funding of the plans. I’ve been giving him a ton of supporting documentation over the last 6 months. So if they can’t get Fed funding and if CC won’t authorize any NJ funding, the plans continue to shrivel up and die. Works for me, and my tax burden.
This BS about NJ’s bond ratings going in the tank if the plans go under is pure nonsense. It will remove a HUGE cloud of uncertainty and improve NJ’s balance sheet immeasureably. The market likes that kind of stuff, it really does. Guess they didn’t teach these scholars that in Investun’ 101.
Fears about ‘brain drains’, employee resignations etc., are also pure
garbage. The publics all have ‘golden handcuffs’ on and few will go anywhere, except a minimal number of younger ones. Fact is, with this lousy economy, likely high secular unemployment for years to come, and other states likely to seriously cut back in the years ahead as well, NJ’s troops really don’t have anywhere else to go, much as they’d like to think otherwise. Plus, most of them are absolutely PETRIFIED of the real-world private job market, and they’d have scores of people applying for any jobs they might vacate anyhow. Not to worry on this score.
I want my property taxes to stabilize, period. I fully support CC’s efforts to finally bring these berserk unions under control and if that means their vaunted pension plans go under because they refuse to acknowledge reality, then that’s simply too damn bad.
Posted by Tough Love on January 13, 2011 at 10:30 pm
Hi SkippingDog, Welcome to NJ’s headache. However, unlike California’s Gov. Brown, who still thinks raising taxes is a big part of the solution, Gov. Christie CORRECTLY recognizes the problem is EXCESSIVE BENEFITS, not a lack of revenue. Unfortunately, even with his recommended (a) COLA elimination, (b) increased Employee Contributions, (c) increased Retirement ages, and (d) the sometimes discussed (sometimes not) 9% rollback of NJ’s 2001 benefit increase, I think its “too-little-too-late”, as the annual asset drawdown (via payouts to retirees) is now too large to overcome.
I think Gov. Christie knows this (we’ve only got 2-3 years left before ALL remaining Plan assets represent out-of-pocket contributions of current employees, and it would be quite unfair to pay this out to the retiree group), which is one reason he’s in no rush to throw more money down this toilet, and would rather end the BS (by starving the beast to death) and reforming it properly …. hopefully by replacing it with a 401K-style Defined Contribution (DC) Plan with a modest matching contribution. Ya ya, I know how horrible this would be …. yup, NJ’s Civil Servants would just have to learn to get by with what their benefactors (Private Sector taxpayers) get. Pretty tough huh…. having to live with the puny pensions that the 85% of citizens (called the Private Sector … who also happen to pay for 80-90% of Public Sector pensions) gets.
I’m still hoping for the holy grail of solutions … a “hard freeze” on the pensions, with everyone switched to DC Plans, but that’s not gonna happen because the Democrats still run the legislature, are still in denial, and are still no doubt gladly accepting Union campaign contributions. Unfortunately, just as in CA, the crisis is gonna have to get even worse before it gets better. Greed and denial, a nasty combination.
Hopefully the new Republican House of Reps. in Congress will (a) pass the Pension transparency bill, (b) ram through Bankruptcy for States, and (c) make it clear that there will be no State bailouts with Federal money, and you’ll just have to get your own house in order …….. as I’ve said for how long … (2 years now ?) …. and that’s going to have to include very significant BENEFIT reductions for FUTURE years of service for CURRENT (yes CURRENT) workers.
Posted by muni-man on January 14, 2011 at 11:53 am
You’re exactly right. Here’s the problem (an egregious example from good ol’ NYC where employee contributions are ridiculously low), but the problem is similar, although usually lower as in NJ, throughout the country:
1. Average NYC Taxpayer-to-Employee Full-Funding Pension Ratio – $8.60-to-$1
a. Teachers – $15.50-to-$1
b. Fire – $10.00-to-$1 (N.Y. Post article)
c. Police – $9.13-to-$1
d. General Employees – $5.60-to-$1 (sanit, transit, parks, etc.)
2. Actual NYC (i.e. Taxpayer) Contributions Made to Keep NYC’s 5 Retirement Plans Fully Funded
a. FY 2000 – $692.8 million (FY09 NYC Comptroller’s Report)
b. FY 2009 – $7.284 billion
c. FY 2010 – $8.7 billion est. (various NY dailies)
d. Annual Compound Rate of Increase in Required Funding (FY2000 thru FY2009) – 29.9%/yr.
e. Increase in NYC Pension Contributions Over 9 Years (FY2000 thru FY2009) – 951%
http://www.nypost.com/p/news/local/you_pay_the_price_hNooJsBk9MtO67HvinglHP
This precarious fiscal situation chased me out of NJ munis last year and I’ll stay out of them until the plans blow up or are fixed (not likely). Then NJ’s
bond rating should improve dramatically since this albatross will no longer be hanging from it’s neck. The Dems in the “Big Three” + NJ are just desperately trying to hang onto their union support. It won’t work, and if the Fed refuses to help out which, appears likely, they’re absolutely screwed – it’s just a matter of time before they realize they can’t prop up their respective s***houses anymore more and throw in the towel. Gonna be very sloppy and nasty, but this game will end over time and probably
within the next 5 years. Just wait until the first one craps out – then it’ll be open season on the plans.
Posted by SkippingDog on January 13, 2011 at 10:36 pm
So, TL, can we assume you’ll feel the same way when NJ begins defaulting on its bond and contract debt with providers other than retirees? That will truly make NJ a special place: deadbeats on payments owed to their own employees, deadbeats on the debt they owe bondholders, and deadbeats on the debts they owe their contract vendors.
New Jersey won’t be able to obtain credit for years to come, and nobody in their right mind would willingly work for an organization that can’t be counted on to fulfill its legal obligations.
Nice plan.
Posted by Tough Love on January 13, 2011 at 10:40 pm
Skipy, The bondholders didn’t make a deal with the devil (Unions and self-serving elected officials in bed together), so why should they suffer the consequences.
Posted by Javagold on January 13, 2011 at 11:57 pm
One of the casualties in today’s Coinstar collapse is none other than the State of New Jersey, which owns a (less than) whopping 460,000 shares. Granted the loss for NJ is only $8.2 million but it is never nice to kick a man down as he is on the very of insolvency.